Conservative Texas Budget: It was too good to be true

The House began debating the budget on Thursday. Unfortunately, the last version of the budget contains spending growth that exceeds fiscal conservative standards for a limited state government.

Things started reasonably well at the beginning of the session. The first version of HB1 showed spending growth under the Conservative Texas Budget (CTB). However, the House Committee Substitute for House Bill 1 (CSHB1) changed this. Following the CTB methodology, that is, without considering property tax relief funds and disaster relief funds for All Funds, the total state spending growth for CSHB1 is 16.3% compared with the CTB of 16%. As a result, the budget has exceeded the CTB by $900 million in dollar figures. This is also way above the 12.33% growth of the Texas economy, according to LBB.

The CTB is a referential ceiling that caps spending growth based on population growth plus inflation. In this sense, any increase in spending should be only driven by two reasons: if more citizens demand public services (measured by population growth) and if the cost of supplying such services has increased (measured by inflation). The CTB guarantees that spending per capita adjusted for inflation remains constant over time. As a result, if Texas spends more than the CTB, expenditures per capita adjusted for inflation are also increasing.

So what? Why should Texas moderate spending?

First, there is no such thing as a free lunch. More spending means more taxes. The revenue of the state comes from taxes and fees. If Texas raises spending, it means that it must raise taxes to fund those spending needs sooner or later. This would mean the end of the Texas Model of low taxes and regulation, making it a less competitive environment for businesses and less attractive for domestic and international immigration. As a result, a higher state weight (7%) in the economy increases the likelihood of crowding out the private sector.

Second, a higher spending level also implies less likelihood of a future surplus. In fact, it increases the chance of having a deficit. Keep in mind that tax collections are more volatile than spending. Texas Public Policy Foundation believes in reverse engineering, meaning constraining expenditure to generate a surplus to buydown taxes like property taxes, thus reinforcing the Texas Model.

Third, more spending implies more bureaucrats administering the state government. Texas’s number of public employees is at an all-time high, reaching more than 2 million people. This represents 14% of the employed workforce in the Lone Star State. The risk of a growing bureaucracy is that it can become a powerful special interest group that can influence politicians to advance their interests, undermining most citizens.

For example, House Committee Substitute to Senate Bill 30 appropriated $5.2 billion of unencumbered balance from the General Revenue to fund additional compensation for public sector retirees. Remember that those resources came from the taxpayer in an environment of high inflation. However, instead of returning those resources to the taxpayer through more tax cuts, the bill proposes to allocate those funds to fix mismanagement issues that could have been resolved within the state employee retirement system. This would be a classic textbook example of concentrated benefits and dispersed costs.

Even though record-high inflation has given generous space for spending growth, CSHB1 has surpassed the limits imposed by the CTB based on population growth plus inflation for All Funds. Therefore, going forward, the Legislature should rein spending and target a 12% growth rate, which would remedy past budget excesses compared to CTB and would be in accordance with the spending limit for General Revenue.